Income Tax Appellate Tribunal - Pune
Sandvik A. B. Sweden vs Inspecting Assistant Commissioner. ... on 18 July, 1995
Equivalent citations: (1996)55TTJ(PUNE)144
ORDER
G. K. ISRANI, J. M. :
This order shall dispose of the two appeals by the assessee and one appeal by the Department pertaining to the asst. yr. 1984-85.
2. The assessees appeal No. 804/Pune/87 is directed against the order dt. 18th March, 1987 passed by the CIT under s. 263. The assessee is a non-resident company which had entered into an agreement with Sandvik Asia Ltd. (hereinafter referred to as Indian company) on 30th Dec., 1982. Under that agreement, the assessee (hereinafter referred to as foreign company) was to receive Rs. 12,50,000 from the Indian company in the asst. yr. 1985-86. The Indian company deducted the tax deducted at source on the said amount of Rs. 12,50,000 at 20% of the royalty payable. The assessee took the credit of the tax deducted at source amounting to Rs. 2,50,000 without offering the corresponding income to tax. The income of Rs. 12,50,000 was not taxed on the ground that the assessee had been declaring and would declare income by way of royalty on receipt basis. On noticing this assessment order, the CIT formed a prima facie opinion to the effect that the assessment order was erroneous insofar as it was prejudicial to the interest of Revenue. He accordingly initiated proceedings under s. 263, and, after having heard the assessee, passed the impugned order, the operative portion of which reads as under :
"8. In view of this legal position, I am of the considered opinion that income of Rs. 12,50,000 is required to be taxed in the asst. yr. 1984-85. I, accordingly direct, the IAC(Asst.) to include that amount and pass the order.
9. As far as assessees request that IAC(Asst) may be directed to allow the deduction of this sum from the total income for the loss suffered by them when the contract was rescinded, I direct the IAC (Asst) to verify all the relevant facts concerned with the rescission of the contract and then decide the issue on merit."
3. During the course of the proceedings before the CIT the assessee had made a plea and adduced evidence to the effect that the agreement dt. 30th Dec., 1982 between the two companies was cancelled as the Indian company was unable to proceed with the project and the related industrial licence was surrendered to the Government of India. Accordingly, the provision of Rs. 12,50,000 made by the Indian company in its account for the year ended 31st Dec., 1983 in respect of this royalty amount had also been reversed by them in their accounts for the year ended 31st Dec., 1985. It was further submitted before the CIT through letter dt. 4th March, 1987 that the contract between the two companies was rescinded ab initio by both the parties concerned and, therefore, it never came into effect. It was pleaded that in these circumstances, irrespective of the method of accounting followed by the parties, no income accrued or arose or was receivable under the contract. This plea, however, failed to persuade the CIT to drop the proceedings initiated under s. 263. Instead, he following the Boards Instructions No. 1230 dt. 20th Jan., 1977 and the ratio of decision of the Madras High Court in the case of CIT vs. Standard Triumph Motor Co. Ltd. (1979) 119 ITR 573 (Mad), held that in case of a non-resident, income accrued in India but received in foreign country is to be taxed under s. 5(2)(b). He further held, after seeking support from the said decision of the Madras High Court, that s. 5(2)(b) would have overriding effect on the provision of s. 145. He thus directed that income of Rs. 12,50,000 was required to be taxed in the asst. yr. 1984-85 and directed the Assessing Officer (AO) to include that amount in the total income of the assessee and pass the assessment order accordingly.
4. The learned counsel for the assessee challenged the impugned order, inter alia, on the following grounds :
(i) The mere passing of entry of Rs. 12,50,000 since reversed to the credit of the foreign company in the books of account of the Indian company did not amount to accrual of income to the assessee.
(ii) There was no real income in the hands of the foreign company as to invite tax.
(iii) The foreign company had all along from earlier year, been declaring its income and had been assessed to tax on receipt basis. In the year under appeal also the foreign company had returned all its income on receipt basis as per its prospectus. Since the impugned income of Rs. 12,50,000 had not been received in the year under appeal it was not liable to be included in the total income of the assessee.
(iv) There is no finding by the CIT to the effect that the assessment order was erroneous, insofar as it was prejudicial to the interest of Revenue. In absence of such finding, the impugned order is not sustainable.
(v) The CIT was not correct in taking a view that the income of foreign company can be taxed only on accrual basis and not on receipt basis.
5. So far as the point at serial No. (i) is concerned, it was submitted by the learned counsel for the assessee that under the terms of the agreement dt. 30th Dec., 1982 a lump sum royalty of Rs. 50 lakhs in respect of technical know-how was payable in four equal yearly instalments. The impugned instalment was the first instalment out of this lumpsum. Since the collaboration agreement between the two companies had been rescinded retrospectively and since the licence was surrendered to the Government of India, the project had not made any headway. There was, thus, no amount due or payable to the foreign company and even on accrual basis the income could not be taxed in the hands of the foreign company. In support of his contention, he relied upon the decision of the Special Bench of the Tribunal in the case of IAC vs. Reinz Dichtunga GmbH and the decision of the Supreme Court in the case of CIT vs. Toshoku Ltd. (1980) 125 ITR 525(SC).
According to the learned counsel, the mere passing of credit entry in the books of account of the Indian company could not amount to earning of income by the foreign company. As against this, it was submitted by the learned Departmental Representative that on passing of the entry in its books of account by the Indian company, the amount which stood at the credit of the ledger account of the foreign company was assessees income on accrual basis and such income was liable to the taxed under s. 5(2)(b). Support in this connection was sought from the following decisions :
(1) Standard Triumph Motor Co. Ltd. vs. CIT (1973) 201 ITR 391 (SC)] (2) State Bank of Travancore vs. CIT (1986) 158 ITR 102 (SC).
(3) CIT vs. Babulal Narottamdas (1976) 105 ITR 721 (Bom).
(4) Babulal Narottamdas & Ors. vs. CIT (1991) 187 ITR 473 (SC) and, Commentary at pages 613/614 and page 3679 of the Income-tax Law by Sampath Iyengar, 8th Edn.
6. We have considered the contentions of the parties made before us and find no hesitation in coming to the conclusion that no income had in fact accrued to the foreign company so as to render it liable to tax. It is not disputed by the Department, and, is otherwise evidenced by documentary proof that the collaboration agreement between the Indian company and the foreign company was rescinded by the two companies with retrospective effect and that the licence granted by the Government of India was surrendered. The project had not taken off at all, and therefore, neither the foreign company was entitled to receive any payment, nor the Indian company was liable to make any payment on account of royalty. The letter at page 29 of the paper book clearly shows that both the parties had agreed to rescind the agreement dt. 30th Dec., 1982 ab initio, inasmuch as the project was not found commercially viable. It was further stated in that letter that no payments would be due from the Indian company to the foreign company under the said agreement. Since on account of rescission of the agreement with the mutual consent of both the parties no amount was due and payable from Indian company to the foreign company, the foreign company could not validly be held to have earned income for the year under appeal even on accrual basis. At this stage, it would be pertinent to reproduce para 7.1 of the agreement dt. 30th Dec., 1982 which reads as follows :
"7.1. In consideration of SAB transferring and supplying the technical know-how to SAL, outside the territory SAL shall pay to SAB in Sweden in Swedish Kroners a lumpsum equivalent to Rs. 50 lakhs (Rupee fifty lakhs only) subject to deduction of Indian taxes, if required, in four equal instalments as follows
(a) Rs. 12,50,000 (Rupees one million, two hundred fifty thousand only) when this agreement has been taken on record by the Government of India."
7. It is stated that the agreement was taken on record by the Government of India on 28th April, 1983. It would be evident from the above that the 4 installments were due and payable in consideration of the foreign company transferring and supplying to the Indian company technical know-how. Now, since the project was not found economically viable and since the two parties had rescinded the agreement ab initio and had surrendered the licence to the Government of India, there was total failure of consideration in the form of supply of technical know-how and, as such, there was no amount due from or payable by the Indian company to the foreign company. Thus, neither the foreign company was entitled to receive, nor the Indian company was liable to pay any amount. In such circumstances, the making of entry in its books by the Indian company was of no material consequence. In this connection, it would be useful to consult the dictionary for ascertaining the legal meaning of the word "accrual". Venkataramaiyas Law Lexicon at its pages 26 and 27 defines the word "accrue" in following terms :
(a) Tax accrues when all events have occurred which fix the amount of tax and determine the tax payers liability to pay the tax.
(b) "Accrue" means "due and payable", "the possession of a present enforceable right";
(c) Accrual indicates a right to "receive", and represents "a state anterior to the point of time when the income becomes receivable and connote a character of the income which is more or less inchoate".
(d) If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody."
8. Now, on the basis of the facts available on the record, it cannot be said that merely on account of passing of entry in its books of account by the Indian company, the foreign company had acquired a right to receive the payment. Since the agreement dt. 30th Dec., 1982 had been rescinded ab initio, and technical know-how was not to be supplied, consideration in the form of supply of technical know-how had totally failed. The Indian company was not liable to make any payment on account of royalty; and the foreign company was also not entitled to receive any payment on that account. Would we say in such circumstances that the Indian company, even after passing of an entry (since reversed) in its books of account would have agreed to pay the amount of royalty by such credit entry to the foreign company? The answer to this question can only be emphatic no. The agreement was rescinded with the mutual consent of both the parties and there was no dispute about it. The rescission was not an unilateral one. As such, the foreign company, i.e. the assessee, was not entitled to receive any royalty, nor had it earned any income, and, therefore, the question of such liability could not arise. So far as the Court decisions relied upon by the learned Departmental Representative are concerned, it would be seen that the decision of the Madras High Court in the case of Standard Triumph Motor Co. Ltd. (supra) which had been the basis of the passing of the impugned revisional order by the CIT has been the subject matter of appeal before the Honble Supreme Court. The decision of the Supreme Court is reported in (1993) 201 ITR 391 (supra). It is on this decision that the main reliance of the Department has been placed before us. A study of this decision shows that the Supreme Court did not find it necessary to express any opinion on the question whether, as held by the Madras High Court, "(i) there was conflict or inconsistency between s. 5(2) and s. 145; and, (ii) in the case of a non-resident like the appellant, cl. (a) of s. 5(2) had no application whatsoever and cl. (b) of the section governed it irrespective of the fact whether it maintained its accounts on cash basis or mercantile basis". In view of the facts before us, we also do not consider it necessary to go deeper into these questions on which the Supreme Court has not found it necessary to express its opinion. Suffice it to say that in view of the discussion made by us in the foregoing paras, it can safely be held that there was no accrual of income to the assessee, i.e., appellant company, and, therefore, no tax liability was invited. In this connection, it was submitted by the learned Departmental Representative that the rescission of the agreement by the letter dt. 7th May, 1985 was a subsequent event, which could not have been taken into consideration in relation to the asst. yr. 1984-85, which is the year under appeal. According to the learned Departmental Representative, since the credit entry in the books of account of the Indian company was passed in the accounting period relevant to the asst. yr. 1984-85, and, since the agreement dt. 30th Dec., 1982 had not been rescinded till the end of that accounting period, the amount of Rs. 12,50,000 represented by that book entry was liable to be included on accrual basis in the total income of the foreign company. We have given our careful thought to this argument of the learned Departmental Representative, but do not feel persuaded to accept it. As has already been discussed above, the word "accrual" is capable of a definite meaning. As has already been indicated above, according to the Law Lexicon tax accrues when all events have occurred which fix the amount of tax and determine the taxpayers liability to pay the tax. Would we, in the face of the facts available on the record, be justified in holding that all events had occurred which determined the tax payers, liability to pay tax in the present case? Since the project had not taken off and there was no transfer and supply of technical know-how and since the parties found the project economically non-feasible and were contemplating to rescind the agreement ab initio, the foreign company had not acquired any right to receive, nor the Indian company was legally or contractually obliged to pay any instalment of royalty. There was thus no earning of income so as to invite tax even on accrual basis. As regards the decision of the Supreme Court in the case of Standard Triumph Motor Co. Ltd. (supra), that Court has refrained from expressing an opinion on the question of applicability or otherwise of s. 5(2)(b). A study of that decision would further show that the factual context of that case and the point at issue therein is distinguished from the facts of the present case. In that case, the non-resident assessee had been filling return of its income on cash basis for the first two years. It then filed its returns for the subsequent two years on accrual basis. It was in this factual context that the Supreme Court took the view that it was not open to the assessee to change its method of accounting and that its assessments for the subsequent two years were liable to be completed on cash basis as in the earlier two years.
9. The contention at serial No. (ii) made by the leaned counsel was that in view of the rescission of the agreement ab initio with the mutual consent of both the parties there was total frustration of the contract. No consideration, therefore, passed from one party to another. It was a promissory agreement and since the foreign company had neither performed not was it required to perform its part of the contract, the Indian company was also not obliged to perform its part and pay any cash consideration to the foreign company. There was, thus, no accrual of income to the foreign company. Since there was no real income, there could be no taxability. Reliance for this purpose was placed by the learned counsel on the decision of the Bombay High Court in the case of CIT vs. Shivsagar Estates (AOP) (1993) 204 ITR 1 (Bom). We have studied this decision of the jurisdictional High Court with great care and find that it offers not only an important but also nearly decisive support to the assessees case. It would be profitable to extract the relevant part of that judgment of the High Court reading as under :
"Income-tax is a levy on income. No doubt, the IT Act takes into account two points of time at which the liability to tax is attracted, viz. the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book keeping, an entry is made about a hypothetical income, which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remain the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account."
In this judgment, the High Court has given effect to the doctrine of real income. In this connection, it would further be necessary to discuss the three other decisions which have been cited by the learned Departmental Representative. First such decision is the judgment of the Supreme Court in the case State Bank of Travancore vs. CIT (supra). Here again the concept of real income has been taken note of and discussed. In this judgment, the observation of Justice Sabyasachi Mukharji (as he then was) with Justice Ranganath/Misra concurring, read as under :
"Per Sabyasachi Mukharji, J. (Ranganath Misra J. concurring) :
(i) For the content of taxable income, one has to refer to the IT Act, 1961, mainly s. 5 read with the other relevant sections.
(ii) In some limited fields where something which is the reality of the situation prevents the accrual of the income, then the notion of the real income, i.e., making the income accrue in the real sense of the term, can be brought into play but the notion of real income cannot be brought into play where income has accrued according to the accounts of the assessee and there is no indication by the assessee treating amount as not having accrued. Suspended animation following inclusion of the amount in the suspense account does not negate accrual and alter the event in the books of account, on the mere ipse dixit of the assessee, no reversal of the situation can be brought about.
(iii) The concept of reality of the income and the actuality of the situation are relevant factors which go to the making up of the accrual of income but once accrual takes place and income accrues, the same cannot be defeated by any theory of real income. The concept of real income cannot be so used as to make accrued income non-income simply because after the event of accrual, the assessee neither decides to treat it as a bad debt nor claims deduction under s. 36(2) of the Act, but still enters the same with a diminished hope of recovery in the suspense account. Extension of the concept of real income to this field to negate accrual after the amount had become payable is contrary to the postulates of the Act.
(iv) Where interest has accrued and the assessee has debited the account of the debtor, the difficulty of recovery would not make its accrual non-accrual.
(v) The following propositions emerge in relation to the theory of real income : (1) It is the income which has really accrued or arisen to the assessee that is taxable. Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation. (2) The concept of real income would apply where there has been a surrender of income which in theory may have accrued but in the reality of the situation, no income had resulted because the income did not really accrue. (3) Where a debt has become bad, deduction in compliance with the provisions of the Act should be claimed and allowed. (4) Where the Act applies, the concept of real income should not be so read as to defeat the provisions of the Act. (5) If there is any diversion of income at source under any statute or by overriding title, then there is no income to the assessee. (6) The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not. (7) Mere improbability of recovery, where the conduct of the assessee is unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. After debiting the debtors account and not reversing that entry - but taking the interest merely to a suspense account cannot be such evidence to show that no real income has accrued to the assessee or has been treated as such by the assessee. (8) The concept of real income is certainly applicable in judging whether there has been income or not but, in every case, it must be applied with care and within well-recognised limits.
(vi) Circulars which are executive in character cannot alter the provisions of the Act. Circulars which are in the nature of concessions can always be prospectively withdrawn."
10. Viewed in the above context of the doctrine of real income, there cannot be any manner of doubt that in the present case no income had accrued to the foreign company. The same ratio can be deduced from the decision of the Bombay High Court in the case of CIT vs. Babulal Narottamdas Legal Heirs of Narottamdas Jethalal (supra) which decision has been confirmed by the Supreme Court in its decision in the same case Babulal Narottamdas vs. CIT (supra). It has been held in that case that there was no dispute between the company and its employee to whom payment of remuneration was to be paid and hence, the income to the assessee had accrued in the respective year. The dispute in the form of Court case was raised only by third parties. In the case before us, there was no dispute between the two companies. The agreement was rescinded with mutual consent. No mutual rights and obligations had arisen in as much as no part of the promissory contract was performed by any party. There was no pre-existing right or pre-existing liability prior to the making of entry in the books of account of the Indian company. Therefore, that entry by itself could not lead to the accrual of rights or liability on the parties.
11. As regards the points at serials No. (iii) and (v), it was claimed by the learned counsel for the assessee, and not disputed by the learned Departmental Representative that the assessee had been returning its income and was assessed on receipt basis. In the year under appeal also, the assessee had accounted for its other income on receipt basis. It was, therefore, not open to the CIT to have directed that this particular so-called income should be accounted for on accrual basis. In case the impugned direction of the CIT is given effect to, it would lead to incongruity, in as much as part of the years income would be assessed on cash basis, whereas other part would be assessed on accrual basis. Since it is not the assessee who has opted for such method of double accounting, it is not legally permissible to tax it according to that method. According to the assessees learned counsel, assessees income on receipt basis for the year under appeal exceeded the impugned amount of Rs. 12,50,000. Therefore, in case the impugned income of Rs. 12,50,000 is taxed on accrual basis, then the other income amounting to Rs. 49,89,860 which has been assessed on receipt basis cannot be taxed. In that event, the assessment order cannot be held to be prejudicial to the interest of Revenue. Here again, we find sufficient force in the argument of the learned counsel, and, are of the view that neither the method of accounting can be changed in respect of the part of the income of the same year, nor the CIT acting under s. 263 has power to direct that it be so done. Reference may be made to the decision of the Special Bench, Delhi of the Tribunal reported in (1989) 31 ITD 67 (Del) (SB) (supra).
12. As regards the point at serial No. (iv), it would be necessary to point out that the jurisdiction under s. 263 is available to a CIT and can be assumed by him only when he records a prima facie opinion to the effect that the order sought to be revised is erroneous in so far as it is prejudicial to the interest of Revenue. Such opinion is recorded before hearing the matter and is necessary for assumption of jurisdiction by the CIT. It is similarly necessary for the CIT before revising an order to record a final finding to the effect that he has found the order sought to be revised as erroneous, insofar as it is prejudicial to the interest of Revenue. No such post-hearing finding has been recorded in the present case. In this view of the matter, the impugned order is liable to be quashed on its intrinsic infirmity and weakness. As has already been pointed out above, the assessee has been offering its income since earlier years on receipt basis. In the year under appeal also it had offered its income on receipt basis. The other income offered in the current year far exceeded the impugned income of Rs. 12,50,000. It was, therefore, incumbent upon the CIT to have considered the whole question in the context of all the relevant facts. The impugned order does not show that the CIT has considered the non-accounting of the impugned income of Rs. 12,50,000 in the context of other income accounted for on that basis in the year under appeal. Thus there is no post-hearing finding by the CIT to the effect that the assessment order was prejudicial to the interest of Revenue. The impugned order is, therefore, liable to be quashed on this ground also.
12.1 In view of the above discussion, we conclude that the imputed order of the CIT cannot be sustained. That order is, therefore, quashed. The appeal No. 804/Pune/87 is allowed.
ITA No. 1783/Pune/88 - by assessee - Asst. yr. 1984-85 :13. In this appeal by the assessee, two issues have been raised. The first issue is the same as the subject matter of the order of the CIT under s. 263. Pursuant to that order, the AO had given effect to the direction of the CIT and included the income of Rs. 12,50,000 on accrual basis in the total income of the assessee. The revised assessment order was appealed against. The learned CIT(A) has, however, refrained to adjudicate this issue on the ground that the same, subject to the decision of the Tribunal, stands concluded by the order passed under s. 263. Since we have quashed the order under s. 263, this issue shall now stand concluded in favour of the assessee.
14. The next issue which has been raised in this appeal of the assessee as well as the appeal (ITA No. 1784/Pune/88) of the Department relates to the rate of tax to be charged on the aforesaid income of Rs. 12,50,000. Since, as per our foregoing decision that income is not liable to be included in the total income of the assessee for the year under appeal, yet it would be proper for us to adjudicate this issue also. This is for the reason that in the event of any reference being made to the High Court, the benefit of our views on this issue would be available to the Court.
15. In the present case, tax was deducted at source by the Indian company at the rate of 20%. The AO taxed this income of Rs. 12,50,000 at the rate of 40%. The assessee challenged the rate in the first appeal, and, the learned CIT(A) has held that this case is covered by s. 115A(1)(b)(ii)(1), and, therefore, the proper rate would be 20%. He has observed that the payments are lump-sum payment for know-how and information transferred outside India. The payments remain lump-sum, even if they are made in instalments. In relation to tax, the assessee has raised the following ground in its appeal :
"3. The CIT(A) erred in holding that the income of your appellant is taxable in India at the rate of 20%. Your appellants submit that assuming without admitting that this sum represents a lumpsum royalty, on a proper construction of the provisions of s. 115A, the CIT(A) should have held that the sum of Rs. 12,50,000 should not be taxed as that section refers to only "royalty or fees for technical services received from Indian concern" by the foreign company. Your appellants therefore pray that even if this sum is considered to be royalty income taxable in India, no tax is chargeable thereon as such income was not received by your appellants within the meaning of s. 115A."
The ground raised by the Department in its appeal read as under :
"(1) On the facts and in the circumstances of the case, the CIT(A) erred in directing that the tax be charged at 20% as per cl. (1) of s. 115A(1)(b)(i) when in fact the assessee is covered by cl. (2) of the same section and is therefore taxable at 40%.
(2) Without prejudice to the above, the CIT(A) ought to have determined that the proportion of payment attributable to description given in cl. (1) and the balance attributable to residuary head instead of stating that the entire payment falls under cl. (2).
(3) The order of the CIT(A) may be vacated and that of the AO restored."
16. On this dispute, it was submitted by the learned counsel for the assessee that the lump-sum payment payable in 4 equal instalments was consideration for outright sale/purchase of technical know-how and that it did not occupy the character of royalty. In other words, he made two contentions. First contention was that even though payable in instalments, it was yet a lump-sum payment. The second contention was that the payment was not on account of royalty, but on account of consideration for outright sale/purchase of technical know-how. In this connection, the learned counsel referred to Art. VII of Agreement for Avoidance of Double Taxation between India and Sweden notified in GSR 112, dt. 23rd Jan., 1959. That Article reads as under :
"Art. VII-Royalties derived by a resident of one of the territories from sources in the other territory may be taxed only in that other territory.
In this article, the term "royalty" means any royalty or other like amount received as consideration for the right to use copyrights, artistic or scientific works, patents, models, designs, plans, secret processes or formula, trade-marks and other like property or rights, but does not include any royalty or other like amount in respect of the operation of mines, quarries or other natural resources, or in respect of cinematographic films."
In this context, he made further reference to the relevant paras of the agreement dt. 30th Dec., 1982 executed between the foreign company and the Indian company. He also made a reference to the decision of the Calcutta High Court in the case of CIT vs. Davy Ashmore India Ltd. (1991) 190 ITR 626 (Cal). With the assistance of this material, he contended that the lumpsum consideration (payable in four instalments) was not consideration for the right to use patents, models, designs, plans, secret process etc., but it was a consideration for the outright purchase of technical know-how. Thus, the payment did not occupy the character of royalty within the meaning of Art. VII of the Agreement for Avoidance of Double Taxation.
17. We have considered this aspect of the matter with reference to the two agreements and the aforesaid judgment of the Calcutta High Court and find that there is absolutely no substance in this argument of the learned counsel. At this stage, it would be pertinent to reproduce the relevant clauses of the agreement dt. 30th Dec., 1982 which have bearing on this issue. These clauses are 2.2. 4.1, 4.2 and 9.1 :
"2.2 : The title in the property of the technical know-how shall pass to SAL on the technical know-how being transferred and delivered to SALs representative in any place outside the territory or the packet containing the technical know-how being handed to the post office or the carrier as the case may be.
4.1 : SAL shall not disclose the technical know-how or any part thereof disclosed to or acquired by it under or as a result of the implementation of this Agreement to any person and SAL shall use its best efforts to ensure that the technical know-how shall be kept secret at all times, provided, however, that nothing here in contained shall be deemed to prevent SAL from disclosing the technical know-how but only insofar as may be necessary (a) to a director, officer or other employee of SAL for the proper performance and discharge of the latters duties towards SAL and (b) to SALS contractor or sub-contractor with whom SAL has entered into an agreement or arrangement for manufacture of equipment and components required by SAL for manufacture of the products. Provided that each such director, officer or other employee aforesaid or the contractor or sub-contractor, as the case may be, prior to such disclosure having been made to him by SAL, shall have given to SAL a prior written undertaking in terms similar to those contained herein not to disclose the technical know-how or any part thereof to any other person.
4.2 Notwithstanding anything contained in this Agreement SAL shall be entitled to disclose the technical know-how or any part thereof to any third party by granting a licence or sub-licence upon the terms and conditions to be agreed upon by all the parties concerned including SAB and subject to the approval of the Government of India.
9.1 The duration of this Agreement shall be for a period of ten years for the effective date of this Agreement."
It is evident from the above that the transfer and supply of technical know-how in the present case does not constitute an outright sale. It is transfer of mere right to use. Clause 4.2 qualifies the right of the Indian company to disclose the technical know-how subject to the agreement of the foreign company. Such qualification could not be imposed in case of outright sale. The duration of the agreement is also for a limited period of 10 years. This indicates that this is a case of user for 10 years and not outright sale. Moreover, the word used in the bilateral agreement dt. 30th Dec., 1982 is royalty. It is of course true that the use of the word royalty is not decisive, but then, such use shall have to be considered in the light of the definition of the word royalty in the Double Taxation Avoidance Agreement. On a cumulative consideration of all the relevant facts and circumstances, we hold that the lump sum consideration paid for the supply and transfer of the technical know-how in the present case constituted royalty. The next issue discussed at the Bar was, as to whether the payment was a lump-sum payment so as to fall within the Item (1) of sub-cl. (ii) to cl. (b) of sub-s. 115A or Item (2) of that sub-clause. Item (1) provided the rate of 20% on the lumpsum payment and Item (2) provided the rate of 40% on the lump-sum payment. In the present case, from a reading of the agreement dt. 30th Dec., 1982, it can safely be concluded that this was a case of lump-sum payment, although the amount was made payable in 4 equal yearly instalments. The relevant clause of the agreement dt. 30th Dec., 1982 is cl. 7.1 which has been reproduced above. It is evident from the above that a lump-sum consideration has been fixed at Rs. 50 lacs, but it is made payable in 4 equal instalments. Nothing, however, prevented the Indian company from paying the entire lump-sum amount in one year. It would, therefore, not be correct to contend that merely because the amount has been made payable in 4 equal instalments, it is not a lump-sum payment and, therefore, Item (2) of sub-cl. (ii) of cl. (b) of sub-s. 115A shall apply. We accordingly hold that had the income of Rs. 12,50,000 accrued to the foreign company in the year under appeal, it would have been taxable at the rate of 20%. In this view of the matter, assessees appeal partly succeeds and is allowed, but the Departmental appeal fails and is dismissed.